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Lower GST on under-construction houses council to look at proposals
Financial Express, February 20, 2019

The goods and services tax (GST) Council on Wednesday will consider various proposals to cut tax rates on under-construction residential property, including a tiered structure with 2-3 rates corresponding to different base prices of the houses, officials privy to the discussions in the relevant group of ministers told FE.

The rates could vary from 1% to 5% with higher rates to be applied on more expensive houses along with absence of input tax credit (ITC) for the builders in case of all categories of houses.

Although the ministers’ group constituted by the Council has recommended that all under-construction houses be taxed at 5% instead of 12% at present, and ‘affordable housing projects’ at 3% (8% at present), it is being reckoned that such straight-forward proposal might not necessarily yield lower prices for all home buyers.

“According to our calculation, the 3% GST rate on houses built under affordable housing projects will not bring the prices down sufficiently. However, bigger houses attracting 5% tax may get cheaper. To ensure benefit reaches low-income buyers, the council would consider another rate, say 1%, apart from 3% and 5%,” an official said.

The proposed change in the tax structure for under-construction housing projects is intended to correct the practice of builders not passing on the benefit of reduced tax incidence under GST compared to the previous regime to consumers.

Currently, GST is levied at 12% on payments made for under-construction property or ready-to-move-in flats (18% GST less abatement of one-third towards the value of land) where completion certificate has not been issued at the time of sale. However, GST is not levied on buyers of real estate properties for which completion certificate has been issued as they are subjected to stamp duty as land is also part of the transaction.

“Blocking ITC raises the input costs for a product leading to a rise in base price, and often the reduced GST rates aren’t enough to bring down prices. Secondly, the practice is against the very principle of GST which works on seamless credit flow,” Rajat Mohan, partner at AMRG & Associates, said.

In one of the earlier GST Council meetings, finance minister Arun Jaitley had identified the tepid growth in the real estate sector as one of the main reasons for less-than-expected GST collection. To spur demand, Jaitley had said the tax rate on residential property needed to be brought down.

ClearTax founder & CEO Archit Gupta said: “The real estate sector is suffering from several issues, so we feel this issue should be looked at more holistically rather than opting for stop-gap arrangements. Businesses are concerned about the new change in terms of ITC and its impact should be discussed in detail at the Council meeting.”

Prior to GST roll-out, under-construction housing projects attracted 4.5% service tax and state-level value-added tax (VAT) of 1-5 %. Also, inputs used in construction attracted 12.5 % excise duty in addition to 12.5-14.5 % VAT. Besides, entry tax was also levied on the inputs. After adjusting for credits on inputs used, the effective per-GST tax incidence on such housing property was 15-18 %, quite higher than the current incidence with 12% tax rate and ITC. However, the benefits of this don’t actually reach the consumer.

The council’s decision would have impact on massive investments being planned in the affordable housing segment; under the Pradhan Mantri Awas Yojana (Urban) itself, the total investments envisaged by 2022 is `3.85 lakh crore. Affordable housing is defined in terms of the cost as well as built-up area.

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